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Executive Shifts, Write-Downs Continue

Just weeks after the departure of former Merrill Lynch CEO Stan O'Neal, news reports have circulated that Mac Gardner, head of global wealth management for the Americas, is leaving the firm. He had reportedly been with the company since 1983.

Such a shift comes as firms re-focus on their core operations, and further write-downs cause the brokerages to pull back from non-core activities, experts say. "They will make their retail operations work, no matter what," explains Richard Bove of Punk, Ziegel & Co. in Lutz, Fla. However, cost cutting across the board should generally result in lower spending on training, recruiting and smaller producers, according to Bove. "This doesn't represent a lower commitment to the brokerage operations, but a reflection of the fact that the firms have costs they cannot absorb at the present time."

Merrill Lynch, now led by former NYSE Euronext CEO John Thain, was expected to announce further losses tied to subprime mortgage in mid-January 2008. It recorded an $8.4 billion write-down in the third quarter of 2007.

There's some speculation by analysts that Robert McCann, who heads the global wealth management division, could be made co-president of the brokerage firm. A group of top Merrill financial advisors has urged the board to give McCann greater power, several sources say.

Such a move would mirror one made recently at Morgan Stanley, which tapped wealth management leader James Gorman as a co-president on December 1 after co-president Zoe Cruz left that firm. Morgan took a $3.7 billion write-down in the third quarter and is also expected to announce more write-downs, analysts say.

"Thain has said several times that the firm will rely heavily on McCann," says Chip Roame, head of Tiburon Strategic Advisors in Tiburon, Calif. "The firm's underwriting ability and its retail business are its two basics. Trading and institutional operations are not a core strength and could be cut back."

What's interesting at Morgan Stanley, which has been trimming and re-tooling its brokerage since Gorman came on board in February 2006, is that it could "do something fundamentally different" in its operating strategy in 2008, says Roame. By promoting Gorman, "Morgan's doubled-down its bet on the brokerage business."

Meanwhile, reports have been circulating that Citigroup may trim up to 10 percent of its work force, which now totals about 327,000, and it could also sell off a business unit. Some stock analysts anticipate that Citigroup will take about $15 billion in write-downs in the fourth quarter, up from the estimated $8 billion to $11 billion. It took a roughly $6 billion write-down in the third quarter.

"But let's be clear," says Roame. "Smith Barney is not for sale." Citigroup has a new leader in place, Vikram Pandit, and Sallie Krawcheck "knows the retail business well," he notes.

Analysts expect Wachovia's fourth-quarter write-down to be as high as $1.5 billion, after a third-quarter write-down of some $1.3 million.

"Wachovia must focus on integration [of A.G. Edwards] this year, while Morgan Stanley could be a near-term innovator," predicts Roame. "Then, Wachovia could announce something big."

Overall, the major brokerage firms will continue to "stumble in their non-core businesses where they over-reached," the consultant says. "It's a lesson they've learned over and over. They must stay true to their knitting. We can't predict what the exact next stumble will be, only its impact. They've got to get back to basics."

"I hope the fourth quarter is the end of [the write-downs]," adds Bove. "But with the economy continuing to weaken, it's a dynamic environment, and that could mean more loans going bad next month."

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Janet Levaux is the managing editor of Research; reach her at jlevaux@researchmag.com.